When the federal funds rate increases, banks make: (a) fewer loans to ensure they do not run low on reserves. (b) fewer loans so they can worry less about borrowing reserves. (c) more loans so they can worry less about borrowing reserves. (d) more loans to ensure they do not run low on reserves.

Question

Christine Dickerson

Business

14 February, 02:24

When the federal funds rate increases, banks make: (a) fewer loans to ensure they do not run low on reserves. (b) fewer loans so they can worry less about borrowing reserves. (c) more loans so they can worry less about borrowing reserves. (d) more loans to ensure they do not run low on reserves.

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Answers (1)

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Alexia Carpenter · Answer 1

a) fewer loans to ensure they do not run low on reserves

Explanation:

The federal fund rate is the rate at which banks do loans between them.

They do this because Bank has the obligation by the law of keeping a part certain level of reserves. If their reserves are low, then a bank will borrow from another bank with a surplus to balance.

At more loans the bank gives, the ratio between bank reserved vs money loaned decrease Because it uses a portion of his reserve to loan money.

When the federal fund rate increase the banks will try to ensure they do not run low on reserves because the cost of borrowing from another bank went higher.